Diversification Explained to Teenagers and Parents

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Investing your money is not something you can postpone for later. On the other hand, you’ll get better results if you do it as soon as possible at a younger age. However, you can’t dive right into it and lose all of your money thinking you are investing them in something. Just like anything else, you must have enough knowledge about it before taking action. If you feel like you need more information about investment, take a look at this article. As you know, investing money is a healthy method of wealth building, but today, we want to discuss another concept called diversification. 

 In simple words, diversification means investing your money in different assets instead of only one. Now, let’s get into more details.

What Is Diversification?

Imagine you have #5 diamonds. (It’s even cool to imagine it!)

Would you feel better and safer putting them in one hidden place, or you’d rather spread them in different safes? 

It’s a rational decision to choose the second one. If by any chance one of your treasure boxes gets stolen, you know you haven’t lost all of your belongings, and that process exactly is diversification.

Professional investors use the same scenario for investing their assets no matter tangible or non-tangible. In order to decrease the risk of losing money, you should create a diversified portfolio.

Now think about a business you like to invest your money in, whether it’s gaming, clothes, or chocolates.

Imagine you’ve invested all your money into one chocolate company called Charlie! If Charlie’s stock crashes, it will damage your whole investment portfolio. 

An investment Portfolio is a collection of investments such as stocks, bonds, fixed assets, etc. 

However, if you invest in other chocolate companies in addition to the first one, even if the whole industry’s stock price goes down, your portfolio may experience short-term success. 

diversification explained to children

Diversification in more details

The chocolate company example could help give you a picture of the diversification concept. 

However, to go more into the details, you should know that the actual diversification includes stocks, bonds, and fixed assets from various industries and companies. 

Bonds:

 As you know, companies need to get loans for their financial challenges. If they get the loan from the investors instead of going to banks, that’s called bonds.

Fixed assets: They can be properties or tools that can develop long-term income.

As we mentioned before, professional investors combine these different assets to better protect their money when investing it. To be honest, investing can be tricky, especially if you’ve just started it. By diversification, you’ll make sure your money stays safe from the market’s unpredictability.

Why Is Diversification Vital for the Investment Portfolio? 

When you want to set deep-rooted investing goals, diversification helps you lower the potential risks and increases higher returns. It’s not predictable which one of your investments wins, but you can be sure that the whole portfolio will not fail.

How to Invest and Diversify your Investment Portfolio

Investing can be a proper method of making money and creating wealth. It’s not specified to people who have a lot of money. Young people can even enter the investing game, but as we said before, you have to gather enough knowledge.
Let’s get to know some marketing-related concepts.

What Are Stocks

Stocks or shares simply are a piece of a company! For instance, if you could buy Apple’s stock, you could call yourself the Apple owner!
The stock prices can go vary based on a company’s reputation, assumptions about its future success, and how well they are making money. Some companies offer their shareholders bonuses.

What Are Bonds

As we mentioned before, bonds or fixed-income assets are like giving a loan to a company. Your money will be paid with interest by the company itself or the government. The interest rate you get from bonds varies based on whether it is long or short-term. People who own bonds can sell them to other people, and that action also causes a change in the bond price. The return on investment from bonds is lower than the stocks.

Other Type of Asset

Real estate, crypto, etc., can be another way for diversification.

kids investing money

What Should We Invest in?

If you could make it here, this means you now know the basics of investment and totally understand the concept of diversification. As we mentioned earlier, investing can always be risky, and you may end up losing your money. 

As a result, before diving into the investing world, you should be able to answer a couple of questions.

  • What should you invest in?
  • How much is the lowest price you can invest?
  • How long should be the time of your investment?
  • How risky is the investment?

When found the best answer to these questions, you can now start investing.

After that, you should do some research, look at the prices, and compare them to last year. Doing that makes it obvious to you that the prices are not stable at all, and when that happens it means the risks will be higher. 

To Wrap Up

Investing money is a great way to make wealth for the future. Based on research and studies, the sooner you start this process, the more you’ll gain money.
However, it’s not logical to put all of your eggs in one basket, and that’s where diversification shines. This concept suggests spreading your money and investing it in different companies and industries.
You can also get better results if you combine different assets like stocks, bonds, properties, etc.
If you’ve decided to help your kids or teens start investing, you can always count on YounGo’s help. Keep track of their money, and analyse the changes.

Free for 1 year if you sign up now!

No credit card required.

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